The Fallacy Of Passive Income

Many people these days have this notion of passive income being the utmost pinnacle of finance. Let’s examine some misconceptions and delve in to the realm of passive income. I think once you wrap your head around this you’ll agree that truly passive income, though difficult to achieve, is something special indeed. I invite you to share your views via commenting and emailing!

How We Make Money

People make income in any number of ways but if you break them down, they all fall in to two categories: Selling a product and/or performing (selling) a service. From the Wall Street trader to the ditch digger to someone selling home woven handicrafts on Etsy, they all fall in to those two categories. Simplifying it one step further, all those people are sacrificing their time to perform their service, in exchange for money. So it boils down to time. Time, the one commodity we cannot replenish and by far the one worth the most.

What about investing? Well, that still takes time and energy to set up, manage and maintain. Once the ball is rolling though, it can pay off huge! Is this passive income? Ehhh…in a way, yeah, but it’s not what the masses are thinking of as passive income. If the investments go sour, your bankroll will suffer. If you stop properly managing your investments, they will decline.

Compounding interest? Again, this could be viewed as passive income and in my opinion it’s a pretty damn good example of it! Stating it very simply, you have money sitting in a bank and it earns money for you. The longer you let it earn money for you, the faster it earns. Even though Albert Einstein did not actually say “Compounding interest is the most powerful force in the known universe” the statement has become a wide spread financial motto for many.

Today’s Notion Of Passive Income

With the advent of the internet in the last couple decades and it becoming more and more prominent in business and personal daily lives, it’s absolutely no wonder why people turn to it for making money. If you do a Google search for passive income there will be a surfeit of results. What are some examples of passive income that have become prominent today? Let’s take a look.

    • Writing an E Book
    • Creating a successful blog or other website
    • Residual income from books, songs, copyrights or patents
    • Creating and then selling a business
    • Rental properties

All of these examples, without exception, take time and effort. Writing an E Book, (anything worth the paper it’s printed on [see what I did there!?]) takes serious time and effort. There are many people who have done this, had the proper marketing approach and made serious money from it, absolutely. If people continue to buy the book after a sufficient amount of time has passed, I think I’d be comfortable calling this passive income. If you are fortunate to have the talent to write something of such magnitude it will sell as such, I would say do it and do it now!

Creating a blog or website can and does provide many people with great income. This is definitely not passive income though. Some sites may not have to have much maintenance done, but they still require content, updates, cleaning et cetera. If the content gets stale or outdated, game over – you lose your traffic and with it your revenue.

Residuals. This is probably the best classic example of passive income I can think of. Imagine if you owned the rights to all of The Beatles songs! (Good purchase, Sony!) Or Star Wars or any other major franchise empire… man, that would be pretty sweet. Every time a song is played, every time a movie is shown, a copyrighted or patented product sold, the owner of that entity gets paid. THAT is passive income! I don’t own any of those. If you do, please email me and mentor me.

Selling a business. If it’s purely the sale of a business, not passive income. Not at all. If it’s the sale of a business while retaining certain rights or kick backs… this could be passive, but it’s a stretch. I don’t like this example because too often people get in to the business of building a business with the intent of selling it for profit and it ends up being harmful. I believe that this mindset detracts from what I believe is a crucial philosophy in business – that one must provide value in order to be successful. People who build businesses for the purpose of selling them, I think, oftentimes fall short of providing true value.

A properly managed rental property can yield pretty decent passive income, but there is a caveat…it must be properly managed. If you are the one managing the rental, doing the repairs, the turnovers, tenant vetting, leasing, paperwork… well, that’s a job. You’re trading your time for the income of the rental property. If you place a property in to the hands of a property management company, yes you’ll earn less money from it but your job and responsibilities are taken care of.

Passive Income In My Life

I believe that to beat the hours for dollars trade off and create true passive income you must figure out how to take every day actions that you’re going to do anyway and make them work for you. If you can figure out how to live your normal life and make money doing it, in my opinion you have figured out something very special indeed. What do I mean by this?

Cash Back Cards
It’s becoming increasingly popular to use cash back credit cards for normal purchases. My girlfriend Christa and I do this for as many expenses as we possibly can. Many of the cards out there earn 3-5% cash back on purchases over the course of a year. That can amount to literally thousands of dollars per year if utilized properly. The cards, of course, must be paid in full each month to avoid interest accrual, but given that, using a cash back credit card for your gas, groceries, utilities and other monthly budgeted items that you’re going to spend money on anyway is a great way to earn passive income! It’s not that you’re not spending time acquiring this money, it’s that you’re not spending any additional time or effort for it.

Taking this money at the end of the year and putting it away letting it begin building interest takes it a beautiful step forward. You are taking money that came your way through no additional effort of your own and making it work for you. Financially speaking, what can be better than that!?

Automating
This comes down to making money work for me again. By making savings transfers happen automatically, I do not have to think about it. It’s planned for and essentially money that I do not have. If I don’t have it, I don’t spend it. It gets transferred on a set day of the month and begins earning interest. No additional effort, but big payoffs.

Everything mentioned in this post is a valid way to make money. The point I wanted to drive home with most of them is that they take serious work, serious commitment and serious time to nurture and develop in to viable vehicles to provide a living for most people. Don’t get sucked in to the notion that you can slap together a website and the next day sit back and collect your fortune. If you do do this, somehow, send me an email and mentor me.

Again, as always, please comment or email! Do you have examples of passive income in your life?

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